The new tax-free childcare scheme – the winners and losers

The launch of the Government’s new tax-free childcare scheme means workers now have more ways to pay for childcare. In order to help employers and their staff assess who’s likely to benefit from the scheme and who’s better off staying put with existing options, such as childcare vouchers, employee benefits firm, Lemonade Reward has looked at the stats.

Basic rate taxpayer couple

Working parents Rita and Fred currently pay £400 per month for childcare, each buying £200 worth of monthly childcare vouchers to pay for this, so £4,800 per year. They collectively save £1,536 in tax and National Insurance contributions meaning their vouchers cost £3,264.

If they put £3,264 into the Government’s new savings account (available through the Gov UK website and run by National Savings & Investments), Rita and Fred’s 20% top-up gives them £4,080 – £720 less than what the vouchers are worth.

If they put £1,688.96 into the new childcare account and it was topped up by 20%, they would have £2,111 to pay towards childcare – a loss of £800. For the 20% top-up to match to their tax and National Insurance savings, they’d need to pay in £2,912. This will boost their pot to £3,640 (but remember they’ve already paid tax and National Insurance on this).

Basic/higher rate taxpayer couple

Working parents, Phil and Michelle are paying basic and higher rate, together they can currently buy £4,316 worth of childcare vouchers (£2,860 basic and £1,456 higher). The salary sacrifice scheme delivers them a collective tax and National Insurance saving of £1,526.72 (£915.20 basic and £611.52 higher), meaning their vouchers effectively cost them £2,789.28.

If they put £2,789.28 into the new childcare account and it was topped up by 20%, they would have £3,486.60 to pay towards childcare – a loss of £829. For the 20% top-up to match their tax and National Insurance savings, they’d need to pay in £7,634. Over this, they’re better off (but remember the Government only pays 20% on savings up to £8,000).

Our conclusion

Greater tax and National Insurance savings can be made through childcare vouchers – so stay put unless you’ve got the spare cash to top up the pot further and make the 20% boost work for you.

Self-employed/basic rate taxpayer couple

Working parents Michael and Paula currently pay £500 per month for childcare. Michael is self-employed so not eligible for any schemes and Paula buys £243 (maximum allowed) worth of monthly childcare vouchers to pay towards the cost, so £2,916 per year. Paula saves £933 in tax and National Insurance contributions meaning her vouchers cost £1,983.

Conclusion

Michael and Paula would only need to put £400 per month into the Government’s new savings account, as the 20% top-up on their £4,800 pot would give them an extra £1,200 (enough to cover their yearly childcare). This is more than the £933 Paula saves in tax and National Insurance.

Self-employed/higher rate taxpayer couple

Self-employed and higher rate taxpayers Ben and Natalie currently pay £500 per month for childcare. Ben is self-employed so not eligible for any schemes and Natalie buys £121.33 (maximum allowed) worth of monthly childcare vouchers to pay towards the cost, so £1,456 per year. Natalie saves £612 in tax and National Insurance contributions meaning her vouchers cost £844.

Conclusion

Similarly, Ben and Natalie only need to put £400 per month into the Government’s new savings account as the top-up on their £4,800 pot gives them an extra £1,200. This is far more than the £844 Natalie saves in tax and National Insurance using the monthly childcare vouchers.

Workers not in schemes

If you or your partner are self-employed it could be a win, win scenario. The self-employed have never been able to pay into a childcare voucher scheme so make the most of this option. The same applies to workers who are not in any company schemes, seize the opportunity to turn 80p into £1.

Lemonade Reward managing partner, David Pugh, comments:

“Although the new savings platform is designed to make your money go further, it’s not necessarily the best option for all. Employers have a key role when it comes to financial education in the workplace and hopefully the examples we have given will help them support workers in identifying the most tax-efficient solution.”